The Dow Jones Industrial Average tumbled 90.24 points, or 0.62 percent, to end at 14,421.49, led by Cisco and IBM. The blue-chip index tumbled more than 120 points at session lows.

The S&P 500 fell 12.91 points, or 0.83 percent, to finish at 1,545.80. The Nasdaq slumped 31.59 points, or 0.97 percent, to close at 3,222.60. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped near 14.

Most key S&P sectors ended lower, led by techs and materials. Telecoms eked out a small gain.

"It looks like the rally's gotten tired—we've been up 13 in the last 16 weeks so we may be due for a pullback," said Jeff Kleintop, Chief Market Strategist for LPL Financial. "In the last few years, late March and early April's been a time when the market tends to peak and sees a 5 to 10 percent pullback. But we'll see a bounce after that, so individual investors can use this market to their advantage and look to buy on the dips."

In the latest development, the Governor of the Central Bank of Cyprus put out a statement to outline a plan to save the nation's struggling banking system and is seeking an immediate vote on it by the House of Representatives. The plan includes protecting bank accounts under 100,000 euros.

In Europe, the ECB told Cyprus it has until next Monday to agree to a bailout plan, threatening to cut off funding to the nation's cash-strapped banks. Earlier this week, Cypriot lawmakers voted against a levy on bank deposits. Banks will remain closed until next Tuesday and Cyprus is considering some form of capital controls to prevent capital flight once they re-open. The country's stock exchange will also be closed on both Thursday and Friday.

Meanwhile, troubled Cyprus Popular Bank imposed a 260 euro per day limit on ATM withdrawals in an effort to deal with high demand. Anxious customers formed long lines at ATM machines to withdraw funds amid rumors that the bank was to be closed down, later denied by the central bank.

"We're seeing the core economies of Europe like France and Germany, which had been growing for years despite the peripheral countries, all in recession now. The economic malaise in Europe is expected to continue," warned Kleintop. "Cyprus is the least of Europe's problems right now."

Among earnings, Oracle slumped nearly 10 percent, its biggest drop in 15 months, after the software company reported earnings and revenue that missed forecasts as software sales and subscriptions dropped 2 percent compared to the company's estimates for a gain of 3 to 13 percent. At least three brokerages slashed their price target on the company.

Among techs, Hewlett-Packard boosted its quarterly dividend by 10 percent to 14.52 cents a share. The news came a day after H-P's board members were re-elected, but shareholders remained disappointment over the company's $11 billion purchase of British software firm Autonomy.

Cisco slumped after FBR Capital cut its rating on the networking equipment maker to "underperform" from "market perform" and lowered its price target to $17 from $22.

Meanwhile, Yahoo bucked the negative trend after Oppenheimer boosted its rating on the company to "outperform" from "perform" and lifted its price target to $27 from $22.

On the economic front, weekly jobless claims rose to a seasonally adjusted 336,000, according to the Labor Department, while a trend reading dropped to its lowest in five years, signaling an ongoing recovery in the labor market.

Meanwhile, existing home sales climbed to an annual rate of 4.98 million in February, hitting a three-year high, according to the National Association of Realtors. Still, the reading was slightly below Reuters estimates for a rise to a 5 million-unit rate.

"Housing is going to remain very positive for the markets," said Kleintop, adding that homebuilders should perform well over the next few months as a result.

Also on the economic front, leading indicators gained for a third month, according to the Conference Board. And factory activity in the mid-Atlantic region grew in March after contracting for two months, according to the Philadelphia Federal Reserve Bank.

In Washington, the U.S. House passed a bill to extend funding for the government through September, avoiding a shutdown that loomed at the end of the month.